MARKET WRAPS
Watch For:
U.S. Revised Productivity and Costs for 4Q; U.S. Weekly Jobless Claims; U.S. Factory Orders for January; Toronto-Dominion Bank 1Q earnings.
Opening Call:
Stock futures crept down while oil prices continued to surge, as investors monitored Russia's invasion of Ukraine and how a jump in commodities prices is likely to impact inflation and the Federal Reserve's monetary policy.
Crude prices surged over $115 a barrel for the first time since 2008, as refiners balked at buying Russian oil, reducing the global energy supply. Investors are worried that a prolonged elevation in oil prices could precede a combination of slowing growth and higher inflation, known as stagflation.
"The inflationary impact of oil and natural gas surges is clear. Inflation is going to be stickier. Interests rates will be pushed up by central banks worried about inflation and that will be bad for growth," said Edward Park, chief investment officer at U.K. investment firm Brooks Macdonald. "Stagflation is the big concern for 2023."
Moscow's invasion of Ukraine has injected volatility into broader markets. Investors are trying to assess how a shunning of Russian commodities, including oil, will feed into already elevated inflation and how aggressively central banks will raise interest rates when faced with additional price pressures and an uncertain economic outlook.
Fed Chair Jerome Powell said Wednesday he would propose a quarter-percentage point rate increase at the central bank's meeting in two weeks.
Russian stock markets remained closed for the fourth consecutive day as the government seeks to limit a firesale, having also imposed capital controls on the ruble.
The London Stock Exchange Group has suspended trading in more than 50 Russian stocks. Index providers MSCI and FTSE Russell have said they will cut Russian equities from their benchmarks next week and S&P Dow Jones Indices is considering doing the same.
Market Insight:
U.S. employers are expected to have added 426,000 jobs in February, signaling robust momentum in the country's labor market, according to Oxford Economics.
Hiring over the month was likely led by the services sector as activity rebounded from the Omicron-related hit, the economic-research firm said. This forecast would leave the level of employment 2.4 million below its pre-pandemic level and Oxford Economics expects the remaining shortfall to be closed in 2H amid robust economic momentum and higher labor force participation.
The employment report for February is due Friday. Economists polled by The Wall Street Journal expect a gain of 440,000 jobs and the unemployment rate to decline to 3.9%.
Stocks to Watch:
Best Buy stock has drifted lower this year, and the Street isn't expecting the electronics retailer's upcoming fourth quarter report will give the market much to cheer.
Best Buy is slated to report earnings before the bell on Thursday morning, and consensus estimates call for earnings per share of $2.72 on revenue of $16.6 billion.
Expectations aren't particularly high going into the key holiday season. The company provided guidance in November when it reported so-so results, and a majority of analysts tracked by FactSet have been bringing their EPS estimate for the quarter down since that report.
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Costco Wholesale will report fiscal second-quarter results on Thursday morning, in what could be a bright holiday performance.
Analysts expect Costco to deliver earnings per share of $2.75 on revenue of $51.4 billion.
Costco is one retailer that still provides monthly sales updates. And the pandemic winner has seen ongoing same-store sales strength in December and January, even if that didn't always help the stock.
The company's previous quarter, reported at the end of 2021, was stronger than expected, even if Costco did warn that it could see supply chain-related toy shortages for the key Christmas season.
Forex:
The dollar rose as Russia's invasion of Ukraine boosts demand for safe-haven assets and investors digest remarks from Fed Chair Powell.
"The U.S. dollar is good safe haven play but it's more of a last resort safe haven, for those who want to get rid of their positions and stay seated on cash waiting for the turmoil to pass," Swissquote Bank said.
Meanwhile, Powell on Wednesday said he would support an interest-rate rise of 25 basis points at the March 15-16 meeting, pushing back against speculation for a 50 basis-point increase. However, he said the Fed was ready to deliver larger and more frequent rate rises if needed.
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The euro fell versus the dollar as flows into safe-havens rise amid the Ukraine-Russia conflict and as the market scales back expectations for interest-rate rises by the European Central Bank, Commerzbank said.
Although expectations for U.S. interest-rate rises have also been pared back, the Fed is still likely to raise rates in March and continue to do so despite the Ukraine crisis, Commerzbank's Antje Praefcke said in a note.
The ECB might hesitate longer before lifting rates even though inflation will accelerate due to rising energy prices, she said.
"Rising inflation which is not counterbalanced with rate hikes plus the risk of weaker growth: that would definitely be a negative constellation for the euro."
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The ruble dropped 11.6% Thursday against the greenback to 116 rubles to the dollar, according to FactSet. Traders say investors' and brokers' unwillingness to touch the currency has limited the ease with which they can trade it.
Currencies of nearby countries have fallen against the dollar as well, as investors worry about economic spillover. The Polish zloty fell 0.8% Thursday, and the Hungarian forint declined 0.7%.
Bonds:
In bond markets, the yield on the benchmark 10-year Treasury note ticked up to 1.870% from 1.862% Wednesday.
Amundi is cautious on U.S., core and semicore duration due to upward pressure on bond yields, but it remains agile amid new dynamics related to inflation and policy issues, it said.
In the current geopolitical environment, U.S. and core European government bonds provide safeguards to portfolios, it said.
Amundi expects income opportunities in Chinese government and euro peripheral debt, considering Italian BTPs as ones offering attractive relative value opportunities versus German debt, given Italy's political stability, economic growth potential, and the ECB's aim to avoid fragmentation in the eurozone.
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A sustained rally in developed market government bonds is unlikely, unless the war in Ukraine causes a sharp fall in output in major developed markets, Capital Economics said.
The war has caused a rally in long-dated government bonds, pushing their yields lower, although bond yields show signs of tentative stabilization Thursday morning.
"At risk of stating the obvious, the moves in bond yields from here will depend crucially on how the war, sanctions and the general level of stress in financial markets evolve, which is highly uncertain," CE said.
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The capital controls that Russian authorities have imposed in response to international sanctions raise significant questions about the Russian state's willingness to service its debt owed to foreign residents, Scope Ratings said.
"These measures indicate elevated risk and uncertainty as regards to policy predictability of Russia," it said.
The measures will hold further adverse implications for financial stability, making Russia more vulnerable to banking and liquidity crises, as well as significantly raising the risk of further negative credit rating actions for the Russian sovereign near term, the ratings firm said.
Commodities:
Oil continued its rally, closing in on the $120 a barrel level, as the market fears extreme tightness if the Ukraine crisis shuts Russian crude out for good.
Sanctions on Russia have made oil traders unwilling to deal with Russian crude, effectively removing it from the market, at a time when markets are already extremely tight.
Brent could rise as high as $145 a barrel, TD Securities said. "Additional upside is still very much in the cards, as the market does not see much replacement supply for Russian product in the near-term," it said.
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European natural-gas prices rose 8%, adding to a surge this week. Investors are worried that supply of natural gas could be disrupted to Europe as a result of the war. About a third of Russian gas exports to Europe flow through Ukraine, according to analysts.
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There could soon be supply disruptions for metals, such as aluminum and nickel, ANZ said, noting that shipping giant Maersk, which handles shipments for Russian aluminum producer United Co. Rusal, recently suspended operations in Russia.
Large volumes of aluminum and nickel regularly flow from St. Petersburg to other European ports and are at risk of disruption, ANZ said.
Russia produces 17% of the world's supply of LME-grade nickel, sought after by the electric-vehicle battery sector, so the scale of a potential supply disruption could be large, ANZ noted.
The three-month LME contract for aluminum rose 2.1% to $3,642.0 a ton and the three-month nickel contract gained 4.1% to $26,935.0 a ton.
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Gold edges higher, buoyed by safe-haven demand.
The precious metal will remain very sensitive to news on the Russia-Ukraine war and should undergo a strong move higher as geopolitical tensions and growth concerns won't be going away anytime soon, Oanda said.
Demand for safe havens will probably remain elevated as the war is only in its early stages, Oanda reckoned.
TODAY'S TOP HEADLINES
Companies Divesting From Russia Are Facing Big Write-Downs
Companies that divest from their Russian holdings will have to book hefty write-downs and face complex accounting judgments, experts say.
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03-03-22 0600ET
